Reliability and assured return are the two key features of an FD investment that makes it popular amongst the investing community. With elections due in a few months and uncertainty in the global financial market, 2019 is again expected to be beneficial for FD investors.
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You too can invest in FDs if you are looking for a safe return. Let’s check out the important things that you should keep in mind before investing in an FD.
Compare FDs on the basis of interest offered over a tenure
Interest rate is a crucial factor that you must keep in mind before investing in an FD instrument. The FD interest rate remains the same for the entire tenure of the investment. A higher FD interest means a higher return on investment. You should compare the interest rate offered by banks and institutions to find out the best interest rates for various tenures.
Credibility of the FD provider
Both banks and companies offer FD products to investors. Banks are popular amongst investors, but the rate of interest provided by them may not be the best in the market. Company FD interest rates are usually competitive; however, there are some small banks which are nowadays popular for offering attractive interest on their FDs.
If you are investing in company FDs, then consider their credit rating. A higher credit rating means lower risk when you invest in a company FD. Banks are the most secure and safe for making a big FD investment. FD investments up to Rs 1 Lac in banks are secured under depositor insurance program by DICGC.
Cumulative Vs. Non-Cumulative FD
A cumulative FD allows the investors to reinvest the interest earned at regular intervals to get compounding benefits, and the total interest is received at the end of the FD tenure. On the other hand, under the non-cumulative FD, the investor gets the option to receive interest credited into an account on a regular interval, i.e. monthly, yearly and so on.
With a cumulative FD, the interest rate is usually compounded quarterly and reinvested with the principal. Cumulative FDs are suitable when you are investing to achieve a long-term goal. Non-cumulative FDs are suitable for retirees and pensioners who require periodic interest income to meet their day to day expenses.
Penalty on premature withdrawal
You need to pay a penalty if you liquidate your FD investment before the end of its tenure. Banks usually penalize you by lowering the applicable interest rate by .5% to 1%. Some banks allow its customers to break FDs premature without a penalty provided they reinvest the funds in another FD product of a longer tenure, within the same bank.
Penalty charges may vary from banks to banks, so if you are selecting an FD product, then look for banks which levy a low penalty on a premature withdrawal.
Loan against FD
One of the crucial benefits of investing in an FD is a loan facility. You can avail a loan against FD facility in case of a financial emergency. Banks usually charge interest at .5% to 2% above the applicable FD interest rate. When looking for the best FD avenue, opt for a bank which offers you a loan against FD with the lowest spread over the FD rate.
If you are planning to invest in a company FD, then you need to be extra careful while checking its credibility. You can take a small exposure in new banks offering an attractive interest rate. For the long-term and for a big FD investment, it is better to rely only on time-tested and reliable, established banks.
(Written by Adhil Shetty, CEO of BankBazaar.com)
